The Takeover

by Stephen W. Frey

  Specialists literally “make the market” for particular stocks. They are set up at specific locations, or “posts,” in the huge room, much the same way merchants set up shop in the open-air agoras of ancient Greece. Whether a trader wants to buy or sell IBM, or any other security for that matter, he has to seek out the specific specialist responsible for IBM and test the market through open outcry. The specialist keeps a list of all those who want to transact—and at what price they will do so. That way, he knows both sides of the market. If there is a little room in the middle, he can pocket the difference. In finance parlance, this is known as an arbitrage. In the gambling world, it is known as a stacked deck. The specialist’s activity is another of the Street’s closely guarded secrets.

  During summer months, runners and floor traders move across the paper-strewn floor with clear purpose but at a leisurely pace. The hectic trading of late spring tapers off from June to August as the world relaxes into summer vacations.

  However, this June morning was different. There was a certain tension on the floor of the Big Board. As they moved about the floor, traders, runners, specialists, and regulators alike cast uneasy glances at the corner closest to the Wall Street entrance. This corner of the floor was home to Grumman Brothers, Incorporated, specialists for Penn-Mar Chemicals. Grumman employees were speaking to one another and exchange governors in hushed voices. Some traders, those who considered themselves good friends with someone at Grumman, were trying to pry information from these specialists. But no one was talking at Grumman.

  Everyone at the exchange was aware of the press release of six o’clock that morning announcing what appeared to be the largest takeover of all time. And the rumor racing around the floor was that the opening volley by Veens, the seventy-five-dollars per share tender price, would be considered inadequate, and therefore hostile, by Penn-Mar’s board. The board was supposedly meeting at this very moment in a conference room at the midtown offices of Morgan Stanley to assess the offer. Early indications were that management and the Morgan Stanley investment bankers were recommending to the full board, some attending by conference call, that Penn-Mar not accept the offer. How this sound bite had reached the floor no one knew—or no one was saying—but at this point it was being accepted as fact.

  Also accepted as fact was that Morgan Stanley would be appointed by the board to seek a white knight—a friendly bidder. And that could mean only one thing: the stock might trade much higher than seventy-five dollars a share even before a competing offer emerged, if in fact it ever did.

  A huge hostile acquisition of one of America’s oldest and stodgiest industrial firms. It hadn’t happened in quite some time, and suddenly here it was, dropped into everyone’s lap like a bombshell from nowhere. Like a huge Christmas present. Though no one wanted to admit to it, everyone, from the most senior trader to the lowliest clerk, was excited. The smell of a quick profit was in the air, a scent which hadn’t pervaded the Big Board in some time. Those on the floor of the exchange seemed almost intoxicated, as though under the influence of a drug. It was a drug called euphoria, and they were all on it.

  New York Stock Exchange trading had started at nine-thirty that day, as it did every day. Now it was eleven o’clock, and still no Penn-Mar shares had traded hands. Exchange governors had held up, or “flagged,” any trading in Penn-Mar shares until they could sort out what was happening. On a typical day, the total trading volume in Penn-Mar shares might be four hundred thousand shares. By this point, after just an hour and a half, traders had received over six million buy and sell orders.

  * * *

  —

  The flag dropped, and bedlam erupted.

  “Buy five thousand at seventy-four and a quarter!” Kent Howard, floor trader for Smith Barney, screamed at one of the Grumman Brothers specialists.

  “I got nuthin’ at your bid!” the specialist screamed back.

  They could barely hear each other over the din. At least seventy traders had suddenly amassed before the Grumman specialists in a matter of seconds as trading began.

  “Seventy-five flat!”

  “Nuthin’! We’re opening at seventy-six! People are convinced Penn-Mar’s gonna fight this thing. It’s a rocket!”

  Howard glanced quickly at the penciled scribble in his book. As he looked back up from the notebook, he noticed one of his runners, dressed in a bright green exchange shirt, jumping up and down at the edge of the pack of traders. People on the floor communicated quickly by hand signals, there being no way for the runner to move into the mass of humanity and communicate the instructions verbally. Howard leaned over the shoulder of another trader and grabbed the specialist. “Give me twenty thousand at seventy-six! I need every share I can get.” He muttered the last few words to himself.

  The specialist nodded. “Twenty thousand at seventy-six! You’re done!”

  Howard felt a body tumble into him, then fall away. Jack Wagner, the grizzled Paine Webber broker, stared up at Howard from the floor, smiling. “Gonna be a helluva day, Kent! A helluva day!”

  “Sure will be!” Howard held out a hand. “You’d better get up before you’re trampled!”

  * * *

  —

  Victor Farinholt leaned over his desk at Lodestar Investment Management and waved a piece of paper angrily at Peter Lane.

  “How in God’s name did you get the tip, Lane?” Farinholt roared.

  Peter Lane shifted uncomfortably in the leather chair of Farinholt’s office. “Huh?” Suddenly there was a ringing in Lane’s ears, but he didn’t know why.

  “Then you haven’t seen the announcement yet?”

  “What are you talking about?” Lane contorted his face into a quizzical expression. “I read the Financial Chronicle this morning.” He hadn’t really. “I didn’t see anything eye-opening in there.”

  “You didn’t look very hard.”

  “What?”

  “Then you haven’t heard?”

  “Heard what?” Lane was becoming exasperated.

  “Some investment firm just announced that it’s going to take a run at Penn-Mar Chemicals. They’re going to pay seventy-five dollars a share for it.”

  Lane stared at Farinholt without seeing. The realization, one he should have come to long ago, hit him squarely in the face with the force of a sledgehammer. They were using him, and although he wasn’t certain exactly how, he was certain that the implications for him weren’t good.

  He strained to keep his composure, to mask the chaos within. “Well…that’s great. We more than doubled the President’s money in a very short time.” Lane needed time to think.

  “Are you completely out of your mind? Do you know what’s going to happen when the papers get a hold of what we did? With the fact that we invested in a stock on behalf of the President just a few weeks before the stock became a takeover target!”

  “Nothing’s going to happen. We haven’t done anything wrong. And why do the papers have to know about our investment decisions anyway?”

  Farinholt shook his head. “We have to report all trades made on behalf of public officials, and all the newspapers check those reports religiously. You should know that.” His voice had suddenly dropped to a whisper. “I spent most of my adult life building this firm, and you are going to bring it down in the space of a few days.”

  “What’s the big deal? Penn-Mar’s a big American company. What’s wrong with the President buying a few shares? I mean, it would almost be un-American for him to not have any shares in this company. Right?” Lane stood. “I think you’re overreacting.”

  Farinholt slammed his fist on the desk. “I am not overreacting!” He took a deep breath. “They’re going to accuse us of insider trading.”

  “Why the hell would they do that?”

  Farinholt stared straight into Lane’s eyes. “Because I’m convinced we did trade on inside information. I never trusted you
. You’re slimy, and I shouldn’t have hired you. I should have listened to the people in the industry who told me to stay as far away from you as possible.”

  “I picked Penn-Mar after doing a butt-load of research, Victor, and I resent you assassinating my character that way!”

  “You did lots of research, did you? Well, then, show it to me. Show me all of your calculations and your computer models that indicated to you that Penn-Mar was a good investment for the President.”

  Lane swallowed hard. He had no calculations or computer models, no real rationale for investing in Penn-Mar. He had simply taken money—four hundred thousand dollars of the original half million was sitting in a Grand Cayman account—in return for their request that Lodestar put the President into Penn-Mar. He had no idea who they were. In fact, he had met only the sexy young woman who had made both the initial contact and request and subsequently delivered the five hundred thousand dollars. But she maintained that she was representing significant interests. And she had the cash to back her claims.

  Lane cursed himself. He should have been more careful. But he had needed to pay off the gambling debts badly because the loan sharks had given him a deadline. A deadline after which they had made it quite clear they would start breaking bones.

  “Do you really have any research, Peter?”

  “I’ve got it back in my office.”

  “Peter, you’re lying to me. Who gave you the tip? I need to know. When this becomes public, I’m going to have a great deal of explaining to do. I’m not going to let this entire firm go down in flames because of you.”

  Lane moved to the door. He walked backward, pointing a finger at Farinholt. “Give me five minutes to put the information together. I need to print it off the computer.”

  “Five minutes, Lane!”

  Lane turned and moved through the door, shutting it behind him. His office was down the hall to the left, but he turned right, toward the reception area. As he moved down the hallway toward the entrance to the firm, his walk became a jog and then a full sprint.

  * * *

  —

  Falcon sat at a small desk positioned in one corner of the partners’ conference room at the law offices of Dunlop & Latham, headquarters for the deal team. He stared at the Bloomberg terminal. It had been set up specifically at his request so that he could maintain constant contact with the market as the deal team strategized throughout the day. The only problem was, he didn’t like what he was seeing on the screen.

  The rest of the deal team—Chambers, Barksdale, and Scott Bartholemew, the transaction partner at Dunlop & Latham—sat at one end of the long table that dominated the room. They spoke in hushed voices, as they had all day. Periodically, young associates would move furtively into the room to deliver a message or request a signature. The men took the message or signed the form, usually without acknowledging the associate’s presence. They were too engrossed in the deal. Because it totaled thirty-two billion dollars. That was billion with a B.

  “Anything new on the screen, Falcon?” Barksdale had been asking this question every fifteen minutes. Exactly every fifteen minutes. It was his way of fighting a bad case of nerves. Chambers had vetoed Barksdale’s signature Dunhill cigars, so he needed something else to cling to.

  “Not a thing.” Falcon glanced at his watch. It was 3:50, ten minutes until close. “I don’t think we’ll see anything until after the market shuts down at four o’clock. Typically that’s what happens. The other side waits until the market closes before they make some sort of announcement. They don’t want to release any information that will make the market any more unstable than it already is. Of course, it’s pretty silly to take that attitude, because trading just keeps going in the shadow markets anyway.”

  “What’s the price?” Bartholemew asked.

  Falcon punched a few buttons. “Penn-Mar is now trading at eighty-one dollars a share.”

  “What’s the high for the day so far?”

  “Eighty-one and three quarters, which was around three o’clock. It’s traded down a little bit in the last fifty minutes or so, but volume has been incredible since three o’clock, almost five million shares. For the day, almost twenty million shares have traded.”

  Bartholemew inhaled deeply. “The arbs that bought in where it opened this morning at seventy-five dollars are getting nervous because there’s been no official announcement from Penn-Mar. They are thinking that Penn-Mar might accept our deal. At that point the share price would fall all the way back to seventy-five. Our bid. And they’d actually lose money.”

  Falcon looked over his shoulder and nodded at Bartholemew. “That’s exactly right. They’re saying, ‘Hey, I’ve made five bucks a share in a few hours. Why should I risk losing that profit if no other bid surfaces?’ ” Bartholemew had surprised Falcon. He was far more knowledgeable about the takeover game than Falcon had anticipated. He had completed all of the required documentation correctly.

  “But that price of eighty-one dollars a share is six bucks above our offer of seventy-five. People must think another offer is coming through.” Barksdale tapped the table with a gaudy fountain pen.

  “Of course they do.” Chambers’ voice was barely audible. He was irritated at Barksdale’s statement of the obvious.

  Cancer. That raspy voice had to be the result of cancer. Falcon stared at Chambers for a few moments. The older man looked worse than he had during their first meeting in NASO’s boardroom. Falcon felt a sudden wave of sadness. Chambers wouldn’t be around much longer. He didn’t know the man that well, but he always felt sad when death’s presence was obvious.

  “Will Werner Prausch be joining us?”

  Chambers’ eyes narrowed as he turned toward Falcon. “No. He will stay in Germany. I will keep him informed.”

  “Andrew, do you think we ought to try to make contact with senior management at Penn-Mar yet?” Bartholemew asked.

  Falcon’s eyes moved from Chambers to Bartholemew. He noted that the transformation hadn’t taken place yet. Bartholemew was still calling him Andrew. But it wouldn’t be long. It never took long.

  “Not yet, Scott,” answered Falcon. “Let’s wait a few more minutes, until after the market closes, to see what happens.”

  Bartholemew did not respond immediately. He sat low in the large chair, elbows resting on the chair’s arms, hands together, fingertips resting on his lips as if he were praying. “Okay.”

  That was what Falcon liked about Bartholemew. He thought about things. He wasn’t susceptible to knee-jerk reactions, and he didn’t speak just to hear himself talk. When he spoke, Bartholemew had something important to say. There weren’t many people like that around.

  Falcon moved from the desk chair to a large leather chair next to Barksdale. “We know they’re all camped out over at Morgan Stanley,” Falcon said, glancing out of the large conference room window. Fifty-four floors above Fifth Avenue, it provided a spectacular late-afternoon view of midtown Manhattan. “And I guarantee they will be there for a while. A long while.”

  Suddenly, the panelled door of the conference room burst open, and a young female associate, Rachel Conway, rushed in. The four men sat up in their seats.

  “I’m sorry to barge in this way, but…”

  Falcon was already moving back to the Bloomberg terminal. He did not hear the rest of her sentence. He punched a sequence of numbers and letters into the keypad, and there it was. The official announcement. Short and sweet. Falcon read the words on the screen to the other three men.

  “This afternoon the board of directors of Penn-Mar Chemical Corporation rejected as inadequate what they termed the ‘hostile’ tender offer made by Veens & Company earlier in the day. The board has determined that in the best interests of the shareholders they will seek other, higher offers. The board has directed its financial adviser, Morgan Stanley & Company, to contact other parties that might have a strategic
interest in acquiring Penn-Mar.”

  Falcon turned to the men. “I don’t think there’s much of a need for us to try to contact senior management at Penn-Mar. We’ve been left at the altar. Now it’s war.”

  * * *

  —

  Falcon moved back into the conference room, a steaming cup of black coffee in his hand. It was eleven o’clock at night. Chambers sat dozing in one of the chairs; Barksdale was in another office making telephone calls; and Bartholemew was off working on another deal.

  Falcon walked quietly to the large window and gazed out at the blazing lights of Midtown. Perhaps he could get away for a few hours with Jenny. They had spoken often since their tryst three nights ago, but he hadn’t been with her since. He laughed. She was so damn interested in what he was doing all of a sudden. Where he was every minute of the day. Andrew brought the mug to his lip. “Ouch!”

  “Still hot?” Chambers asked.

  Falcon turned quickly, almost spilling the coffee. “Yes. Yes, it is.”

  Chambers’ eyes were just slits. He was obviously weak from the long day. “I should thank you for your help that day at NASO. But I’m not going to.”

  Falcon smiled and ran the thumb of his left hand up and down the underside of his bright-red suspenders. “That’s fine.” He moved to the table and sat in a chair near Chambers. “I do have one question though.”

  “What is that?” Chambers asked gruffly.

  “When you were first starting to cough badly, you called out a name. You said, ‘Katherine. Katherine, help me.’ I checked out your bio. Your wife’s name is not Katherine. Now, is there something we ought to know?” Falcon winked.

  “What are you implying, Mr. Falcon?” Chambers hissed.

  “Secretary, daughter’s friend, I don’t know.” Falcon tried to smile innocently.